Boehner Must Reassure Markets on Debt Ceiling, Zandi Says

House Speaker John Boehner speaks after meeting with the House Republican caucus in Washington, D.C., on April 8, 2011. Boehner has to reassure Wall Street that Republicans will raise the U.S. debt ceiling without undercutting the party's demands for spending cuts. Photographer: Jay Mallin/Bloomberg

May 9 (Bloomberg) -- House Speaker John Boehner’s
appearance before Wall Street leaders tonight challenges him to
provide reassurance that Congress will raise the U.S. debt limit
without undercutting Republican demands for spending controls.

Investors attending Boehner’s speech to the Economic Club
of New York dinner will be listening for the Ohio Republican to
describe the path to an agreement on raising the debt ceiling
and installing new deficit controls between the Republican-run
House and Democrats led by President Barack Obama.

“What Wall Street wants to hear is that they are going to
raise the debt ceiling in a timely way,” said Mark Zandi, chief
economist at Moody’s Analytics Inc. in West Chester,
Pennsylvania.

Investors expect “policy makers are going to negotiate and
debate,” though they want assurances that “when it comes down
to brass tracks they are going to raise that debt ceiling,”
Zandi said.

Following his speech, Boehner, 61, will be questioned by
Peter G. Peterson, co-founder of Blackstone Group LP, and Jane
Hartley, chief executive officer of Observatory Group LLC, an
economic consultant.

The government will reach the $14.29 trillion debt limit no
later than May 16, though Treasury Secretary Timothy Geithner
says the government can keep borrowing by taking “extraordinary
measures” until Aug. 2.

‘Remote’ Possibility

In an April 28 speech, Geithner said economic damage could
occur if credit markets react to “the possibility, however
remote, that the U.S. might default.”

“The stakes are high for Speaker Boehner,” Senator Chuck
Schumer, a New York Democrat, told reporters on a conference
call today. He called on Boehner to provide “unwavering
reassurance” to the credit markets that House Republicans won’t
allow the U.S. to default on its obligations.

“The markets do not want to hear more threats,” Schumer
said. “The time for brinkmanship is over. There is a lot on the
line.”

The markets will become worried if there’s not significant
progress on the debt negotiations by the middle of July, Schumer
said.

Boehner, who negotiated with Obama an 11th-hour package of
more than $38 billion in spending cuts to avert a government
shutdown last month, will explain to results-oriented investors
that without budget reforms there are not enough votes in the
Republican-run House to raise the debt ceiling, said a
Republican leadership aide speaking on condition of anonymity.

Consequences of Default

The consequences of a default are much more severe than
those of a government shutdown, Roger Altman, founder of
investment bank Evercore Partners Inc., told reporters on the
conference call with Schumer.

The U.S. is the largest borrower in the world, and “if
America were to default, even for 24 hours, that would have an
unprecedented and catastrophic impact” on global financial
markets, said Altman, a former U.S. deputy Treasury secretary
under President Bill Clinton.

Altman said there can’t be “head fakes” on default and
that Boehner should “renounce default.” Altman said the
business and financial communities are united behind the
position that lawmakers must be clear they won’t allow a
default.

Republican strategist Ron Bonjean said Boehner has “got to
take a hard line” on Republican demands for new spending
controls to curb the spiraling government deficit.

Giving Reassurance

The speaker will be able to give Wall Street some
reassurance by taking credit for “forcing Democrats to the
table to negotiate spending cuts,” Bonjean said.

Boehner can’t go any further because “you can’t tell Wall
Street with a wink and nod that you are going to raise the debt
limit because it will definitely affect our bargaining position
with the White House,” said Bonjean, once an aide to former
House Speaker Dennis Hastert, an Illinois Republican.

Boehner can tell investors the government “won’t have to
exceed the debt limit” because there are negotiations and
“Democrats are willing to participate in that end game,”
Bonjean said.

The speaker also can cite broad public support for deficit
reduction that will give Democrats a political incentive “to
try to figure out some kind of package” of spending cuts and
budget reforms, Bonjean said.

‘Reasonably Close’

“What the market would like to hear is that the two
parties are reasonably close to agreeing on something and the
debt ceiling will be raised,” said Ajay Rajadhyaksha, head of
U.S. fixed-income strategy for the Barclays Capital Inc. unit of
Barclays Plc.

Wall Street is looking for such a deal to be reached by
early July, Rajadhyaksha and Zandi said.

If the negotiations drag out much longer than that, “the
dynamics of the thing could change quite rapidly as investors
could get quite nervous,” Zandi said.

“The worst-case scenario is I am sitting here talking to
you at the end of July and the debt ceiling has still not been
raised,” Rajadhyaksha said.

The talks in Washington on the issue began May 5 at a
negotiating session hosted by Vice President Joe Biden where
both sides outlined their demands.

Republican leaders signaled that their plan, included in
the House-passed 2012 budget resolution, to privatize Medicare
for future beneficiaries who are now younger than age 55 was on
hold during the discussions about the debt limit.

Political Realities

Boehner said political realities dictated that the Medicare
plan was unlikely to pass Congress with Democrats in control of
the Senate. He made the comment when asked why Representative
Dave Camp of Michigan, the Republican chairman of the House Ways
and Means Committee, had said he didn’t plan to push the
Medicare plan because it would likely die in the Senate.

Still, Boehner, who is represented at the talks by House
Majority Leader Eric Cantor of Virginia, told reporters at his
May 5 press conference that “nothing is off the table except
raising taxes.”

The speaker vowed that Republicans “will not increase the
debt limit without real spending cuts and budget reform.”

Cantor blamed Obama for refusing to consider the Medicare
plan as part of the debt-ceiling discussions. “The reality is
this president has excoriated our budget plan and the Medicare
proposal,” Cantor said. The Republican leader said the Medicare
plan, as well as other elements of the House-passed budget plan
to cut $6 trillion over 10 years, “will be the subject of
future meetings.”

Tea Party

Republicans are under pressure from Tea Party groups who
have promised primary challenges against Boehner and other party
leaders if they compromise on spending cuts.

Tea Party activists attacked Boehner for supporting an
increase in the federal debt limit at a press conference in
Washington today.

Representative Michele Bachmann, a Minnesota Republican and
possible presidential candidate, sent a statement to the event
that said, “It’s time to reject the debt ceiling scare tactics
and address the truly frightening reality that our debt is at
$14 trillion and growing.”

Bachmann was among 59 Republicans who voted against the
budget deal that Boehner worked out in April with Obama.

So far, the markets have shown few, if any, signs of
investor anxiety. The yield on the benchmark 10-year note was
3.15 percent on May 6, down from an average of 4.33 percent from
2000 through 2010 on a weekly basis.

Zandi said investors understand the negotiations in
Washington are complicated. They wouldn’t be “too upset there
is a fair amount of negotiations and debate,” he said.

More important than the content of Boehner’s message is
“how he says it and his demeanor and his level of confidence,”
Zandi said. It’s “very, very important” that Boehner
“convinces people that policy makers really understand what the
stakes are.”